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Аttorney, Head of Family and Inheritance Law Practice, Head of the Family Law Committee (UAA), Attorneys of the Year 2019 (UAA) (2019), MITRAX
Sharing Business Assets Between Spouses
Companies (share in authorized capital or stock) owned by spouses, like other joint property, are subject to division. In turn the process of such property division has its own characteristics, since courts proceed not only from the general principles of property division, including the legal regime of joint property of spouses. They also consider the rights and interests of other persons (shareholders, company members). The existence of an agreement between the spouses on property division between them greatly simplifies the procedure, but in practice it is rarely concluded. Disputes around this issue are a usual practice.
General Principles for Sharing Business Assets between Spouses
The current legislation of Ukraine does not contain clear requirements that apply to the division of corporate rights belonging to one of the spouses. This causes additional difficulties in the division of a business, since the spouses do not fully understand the characteristics and principles of the process. Each separate type of such property (LLC, JSC, Private Enterprise), as well as the property of an individual entrepreneur, requires a separate approach and has its own features.
All that leads to the need for a separate study of each type of corporate rights and the procedure for their division. Judicial practice also has significant differences.
In accordance with clause 1 of Article 61 of the Family Code, any property acquired in marriage can be considered common (except what was withdrawn). Business assets, regardless of their type (stock, share in authorized capital), can also be recognized as jointly acquired.
Legislation does not contain any restrictions, excluding shares or stocks, as well as dividends from them, from the list of matrimonial assets. Thus, when they are divided, the general rules of law apply. However, it is worth considering certain characteristics. For example, the rights and interests of third parties and the special procedure for registering such rights.
Shares also relate to civil rights objects (Article 177 of the Civil Code). Accordingly, such property is not excluded from circulation and can be recognized as jointly acquired if acquired in the course of a marriage using common funds.
A joint stock company is a legal entity divided into a number of shares. Each such share has the same value. The rights of participants are confirmed by stocks which determine the shares of ownership and rights to organize (p. 1 of Article 3 of the Law of Ukraine On Joint Stock Companies).
The action determines not only the right to an appropriate share in the company, but also the right to receive dividends. In the event of liquidation of the company, its property will also be distributed in accordance with the shares held by shareholders. Another point — stock determines certain non-property rights in accordance with Part 1 of Article 6 of the Law of Ukraine On Securities and the Stock Market.
Any shareholders may alienate their stock without the consent of the other participants (part 1, Article 7 of the Law of Ukraine On Joint Stock Companies). Accordingly, even if a block of stock is executed for one spouse, but was acquired in marriage, he/she can transfer the required part to the other spouse. The only condition is compliance with the principle of indivisibility of each individual share established in Part 1 of Article 6 of the Law of Ukraine On Securities and the Stock Market.
When dividing stock, spouses should take into consideration certain points:
– not only is the stock itself subject to division, so are the dividends received from it;
– it is necessary to determine either the value of each share separately, or the value of the block of shares.
In turn, if the stock was sold by one spouse without the knowledge of the other, the latter has the right to demand:
1. Compensation of the stock value, or
2. Rescission of contract.
Limited Liability Company
The general rule is that if a share in the authorized capital of a LLC was acquired during the marriage period, it is taken into account when dividing property. However, there are some peculiarities that should be taken into account.
The plenum of Supreme Court of Ukraine in clause 28 of Resolution No. 11 of 21 December 2007 indicates that contributions to authorized capital are not recognized as common property. This is due to the fact that according to Article 12 of the Law of Ukraine On Business Entities, the relevant company is the owner of the property or funds, which was transferred to it by the founders as a contribution to the authorized capital.
Thus, initially, on any jointly acquired object, the right to common property is formed. But if it was included in the company, the other spouse is deprived of the right to own it. He/she receives the right to claim half of its value in the event that the total funds or property was not used in the interests of the family (para. 3 clause 28 of the Resolution of the Plenum of the Supreme Court of Ukraine). In turn, if the contribution to the authorized capital was made at the expense of the common property of the spouses in the interests of the family, then the other spouse has the right to share the income received (para. 2 of clause 28 Plenum of the Supreme Court of Ukraine).
In fact, the spouse receives the right to compensation, which satisfies his/her rights and retains the rights of the company and its other members. The Grand Chamber of Supreme Court adheres to this position in a decision of 13 March 2019, which was adopted in case No. 756/10797/15-ц (proceedings No. 61-40676св 18):
“Thus, if one of the spouses is a participant in a business company and contributes property acquired at the expense of matrimonial common capital into its charter capital, then such property becomes the property of this enterprise, and the ownership of the property is transformed into the right of claim from the other spouse (mandatory right), the essence of which is the right to claim half of the value of the contributed property in the event of division of matrimonial property or the right to demand half of the income received from the activities of the enterprise.”
The above-mentioned provides the basis for conclusion that when dividing a share in the authorized capital of a company, the following principles should be adhered to:
– from the time the common property is transferred to the authorized capital of the company, it loses the signs of being joint matrimonial property and becomes the property of the company;
– the spouse receives the right to demand compensation of half the cost of the share in the authorized capital or income received from the activities of the company, depending on whether property (funds) was transferred to the charter capital of the company in the interests of the family.
Private Enterprise and Individual Entrepreneur
Resolution of the Plenum of the Supreme Court of Ukraine No. 11 of 21 December 2007 in clause 29 determined that the property of private enterprise cannot be an object of joint ownership. A spouse is entitled only to a share of the income of such an organization.
Significant changes were made after the decision of the Constitutional Court of 19 December 2012 established the opposite; if the property of a private enterprise was formed at the expense of the common property of the spouses, it is also subject to division in accordance with standard rules.
Despite the fact that the clarification was primarily related to a private enterprise, in practice, IE property has also become the subject of a common joint ownership right. However, not all, but only the property, the source of acquisition of which were the common means of the two spouses. If the IE was able to prove in court that the property was purchased at the expense of an individual entrepreneur and was acquired for the purpose of conducting business, then it was not uncommon to recognize such property as the personal property of the IE.
However, in the future, judicial practice was reformatted in such a way that only the source of its acquisition remained the criterion for classifying IE property as the joint property of the spouses. That is, if the property of the IE was acquired for entrepreneurial activity, but at the expense of the common means of the spouses, then such property is subject to division.
The most current and recent practice of the Supreme Court confirms this. Thus, in the decision of the Supreme Court of 10 April 2020 issued in case No. 734/2887/17, the following was stated: “Therefore, the property of an individual entrepreneur, which is used for their economic activity, is considered the common property of the spouses, as well as other property acquired during the marriage, provided that it is acquired at the expense of funds belonging to the spouses. The use of the specified property by one of the spouses for carrying out entrepreneurial activity can be considered when choosing the method for division of this property.
Thus, a systematic analysis of the above substantive law enables us to conclude that the property of an individual entrepreneur can be the subject of joint property of the spouses and the subject of division between each of the spouses, considering the general requirements of the law regarding the criteria for determining the legal regime of common property of spouses and its methods of division between each of the spouses.”
Thus, when dividing IE and PE property, in fact, only the source of funds for which the property was acquired has a significant role. If it is acquired in marriage, then it is divided according to general rules. If not, then only the income from it is divided.
The regime of joint ownership of spouses is also applied to business assets, including shares and stocks in authorized capital. However, the process considers the rights of other persons, including the organizations themselves, as well as the sources of capital for which such objects were acquired. In some cases, a spouse does not have the right to a share in the right of ownership, but to compensation, which he/she must demand under standard conditions. That is, through a court in the event of refusal of voluntary satisfaction of the claim by the spouse.